Global economic update

Risky assets rallied with China cutting its reserve requirement ratio (RRR). China’s central bank (PBoC) announced over the weekend a 50bp RRR cut for all banks, effective 24 February. This may release about CNY400bn of liquidity into the banking system, and would likely help smaller financial institutions and assist SMEs and private enterprises. Economists expect the PBoC to cut the RRR by another 50bp in Q2 but rule out further policy stimulus.

Meanwhile, Japan’s Finance Minister Azumi has said that China and Japan support providing extra funding for the IMF to help Europe, after a meeting with China’s Vice Premier Wang in Beijing. This is against the backcloth of Japan’s record trade deficit of Y1.48tn in January, up from a revised Y205bn deficit in December. Exports fell 9.3%yoy while imports surged 9.8%yoy. Economists expect a current account deficit in January of about Y0.25tn and that the January-March period will record a smaller surplus of Y1.5tn or about 1.3% of GDP, with the view that the current account may return to deficit as early as FY2014. Separately, the leading index came in at 94 for December from 94.3 in November while the coincident index rose to 93.6 in December from 93.2 earlier

In Europe, Euroland finance ministers meet at 14.30 GMT to discuss and decide on the terms of the second Greek financing programme and debt exchange (PSI). It is likely to provide details on the exchange offer terms for PSI and the austerity conditions attached to the disbursement of financing. An agreement on the bailout would pave the way for the PSI offer to take place on Tuesday or Wednesday. The announcement that a decision on both counts has been reached is likely to be positive for risk appetite in the near term, and Germany’s Finance Minister Wolfgang Schauble has made positive noises, saying that Greece is “on the right path” and that pension cuts agreed by the Greek cabinet over the weekend would be enough to secure approval for the EU/IMF bailout package.

That said, there is a real risk that participation in the debt exchange falls short of the 75% level on which current debt/GDP targets are based. This would call for the enforcement of collective action clauses (CAC), triggering non-voluntary restructuring. Credit default swap (CDS) contracts would be triggered as a result, most likely with negative implications for risk appetite.

More immediately, any delay in reaching an agreement today would likely be very negative for risk assets. With less than a month before the 20th March bond redemption, failure to reach an agreement would increase the likelihood of Greece defaulting on its payment and several days of buffer would be needed ahead of the redemption date and after the end of the PSI offer window, now tentatively set to close on 10 March.

Whilst resolution of debt issues is very important, it is noteworthy that this week’s data are likely to provide further evidence of stabilization in the core economies. Economists expect the flash PMI (Wednesday) rose to 50.0 on the manufacturing headline and 51.0 on services, up from 48.8 and 50.4, respectively, in January. The German IFO survey (Thursday) is also expected to show signs of improvement, with a significant pick-up in the expectations component.

For the US, data covering existing home sales and jobless claims are expected to extend the recent trend. Economists expect a 0.9%mom increase in January existing home sales on Thursday, and 340,000 for jobless claims. Data in line with expectations should be marginally supportive of risk appetite.

With a domestic focus, we are due Bank of England MPC minutes this week. The minutes may show two members of the committee dissenting from the decision to add to asset purchases in February, and such dissent should support market expectations that the current round of QE may be the last. Less risk of further debt monetization means that the pound could potentially attract more official flows, especially if Euroland sovereign risks intensify. We still look a long way off a rate hike in the UK.

James Bevan is chief investment officer of CCLA, specialist fund manager for charities and the public sector. CCLA launched The Public Sector Deposit Fund in 2011 to meet the needs of local authorities and other public sector organisations. You can follow James on twitter @jamesbevan_ccla

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